PREDICTION: Google or Facebook buy Groupon post-IPO at a significant discount on its current ridiculous $1 billion valuation.

The set up:

I signed up to Groupon last year and stupidly gave them my main email address for what was quite a nice offer. Half price dinner for two at a local restaurant. After that, I opened a few of the offer emails they sent me every few days. Some were of interest, but mostly were just noise.

Over time this just got worse.

Now I’ve set a filter to auto-junk all emails from Groupon deals.

Looking at the core reason for setting this filter, it’s clearly an issue of targeting. I was getting offers for Groupon spa days. It should be fairly clear that a 32 year old start-up entrepreneur does not need spa days. Groupon just doesn’t know me.

And this is where Google and Facebook come into the picture. Imagine the value add either of these two could pour in to the Groupon base formulation. They know more about their users than anyone else on the planet. Combine that with Groupon deals and you have Targeted Local Business Offers. That’s the gold standard. That’s the holy grail of local advertising. That is the kind of email I would open regularly because it KNOWS me. It knows what I like and I can be fairly certain it’ll be something I like. It’s valuable.

What’s the value in Groupon?

The relationships they’ve built with local business. Their customers are fickle and don’t give a damn. They move to the best offer they see and that’s that. But those businesses who’ve used Groupon in the past, those who know the process and are happy to use it to their advantage will remain loyal, and it’s there that Groupons value lies. It’s that loyal business listing database that any competition will struggle to compete with because to build it takes TIME, not just money. It’s a deliciously difficult barrier to entry.

Why should Google buy Groupon?

Google knows you. It knows its users and it NEEDS local business for the AdWords model to take the next step up. Combined with mobile computing and smart phones being the future, Google buying Groupon would be a smart move indeed. The only thing stopping them would be the ego of a big company reluctant to buy what they think they can create in-house, forgetting the time loyalty requires to mature.

Groupon started out heavily advertising on Google through AdWords. Google has the information to track and trace your every move, your interests, likes and dislikes. Building a recommendation algorithm for local business deals is a walk in the park once you have all the pieces. But I don’t think Google adds as much value as…

Why should Facebook buy Groupon?

It has that perfect customer base for Groupon. It has the interests and network advantage over Google. If Facebook leverages correctly it could significantly add value to the Groupon contacts database that Google would struggle to match.

As with Google, I’d argue ego is the main factor holding Facebook back from purchasing Groupon. They’ll likely attempt it in house and fail before realization sets in and they buy it out at a sweet price point.

Here’s how I see it:
Groupon IPO tanks early on, investors bail, Facebook picks it up cheap as chips early next year.

I’d think quite a lot of people have blocked them out. The thing with a domain is it’s for life. Once it’s blocked out, it’s pretty much forever. The only way around it is to get a new domain or own the filter and bypass user preferences (Google or Facebook could do this).

I dislike groupon for a myriad of reasons, but in terms of its valuation, it’s garbage. Here’s my primary problem with it; revenue recognition. Per international accouting standards, you cannot mark revenue as earned until 1) cash/cash equivalents have been received 2) good or service is transferred or rendered to the buyers.

Groupon marks its revenue as soon as you pay for the groupon, i.E, if you pay $50 for a deal, groupon says that $50 is all mine. When you use that groupon at the vendor, groupon says “Oh, now that you’ve used the groupon, I will give $25 to the vendor. I will mark that as cost of revenue” The goods/service aren’t received until the customer uses the coupon, not when he buys it, so revenue shouldn’t be recognized until its used, the same time groupon turns half the profit over to the vendor.

On their IPO, groupon said last year they had $770 million in revenue. That’s the biggest load since Enron; they didn’t have 770 M, they had half of that. 50% of the revenue goes straight to the vendor, Groupon never even has claim to it. If you look at the S-1, where it says gross proft margin, that is groupons actual revenue.

It’s analogous to Enron. When Enron got a gas contract for 10 years, it marked the entire 10 years of gas as revenue, when in reality, tehy could could book 1 year. So the only way Enron could continue to survive is getting new gas contracts. Like Enron, the only way Groupon will survive is continue to get more local vendors to sell deals. And, with the way many of these vendors feel after using groupon, I think that number will steadily decline.

Groupon also probably violates the Federal Credit Card Accountability, Responsibility, and Disclosure Act which vigorously regulates the use of gift cards, which a groupon is in my opinion. It’s currently being sued by Johnson and Johnson (not sure if thats the right company but think so) for violating the CARD act, and in my opinion will lose that law suit which will not only cost it punitive damages but greatly increase its operating costs.

Finally, there is nothing to stop another company from doing the same thing groupon does. It has no entry barriers, anyone can do it and groupon dished out 10’s of million of dollars last year alone buying up rivals. I have a mind to create one just to get a $5 million cease and desist credit from groupon.

My recommendation of Groupon? Short/Sell/Put option. But I do agree that google could knock this out of the park with targeted advertising. Supposedly groupon turned down a $6 Billion offer from google before they went public.

Interesting details Dominathan…very interesting. The technical arguments you’ve made stand on their own merit. I’m going to take a closer look at the Groupon S-1.

Groupon Vendor feeling – I’ve heard the stories just like you have. Many disgruntled vendors, but there are also some who have been happy with the service and custom generated. Consider this, if you use Groupon and had a bad experience, you’d tell everyone because people love complaining. If it worked out well for you, Groupon becomes an advantage. You’d not tell your competitors, in fact you’d go out of your way to discourage competitors from using Groupon. Given the ratio of bad reviews to good as well as some insider stories I’ve picked up, I’d say public/business sentiment contains too much uncertainty to be of use.

Groupon customers – It started with hipsters looking for something new in their local area. Now it’s mostly bums looking for a cheap deal. That’s a significantly different customer base in terms of value proposition to the business providing the deals. If I had a business, I would not use Groupon with their current userbase as it would reduce long term earnings under the assumption that the people going for the deal are my customers anyway and just looking for a cheap deal.

Types of Groupon Business – Having said that, there are some businesses that just don’t scale well. It’s these that fill the majority of complaints. Restaurants are a clear example. A Restaurant offering a Groupon deal can be flooded with customers, yet has a limited number of seats. Booking arrangements can be made for Grouponers, but that’s extra workload. Again with the bum customer base, that long-term value just isn’t there anymore. On the other hand, business that CAN scale well have seen significant returns from using Groupon, online ecommerce outlets for example.

Unique Selling Point – Just what is Groupon’s USP has been argued by many with little weight given to any particular answer. Some say it’s their customer base, some say it’s their very high quality database of local business contacts (something which the likes of Foursquare would find difficult to emulate). To see their USP, we need to look at where they’ve spent their cash. For Groupon, it’s their client contacts. Effectively their call centre. For this reason, I say their USP is indeed their high quality database and contacts. However, if someone called my business offering a better commission structure for the same potential revenue that I can obtain from a Groupon deal, i’d jump at it. The database is valuable as something to be sold separately, a possible additional revenue stream into an eventual vertical pivot? Possibly, but unlikely now that it’s being dressed for IPO.

As for creating a Groupon competitor? Go for it. But what’s YOUR USP? Because without that, you’re just as likely to be overtaken by the next big thing.

Id say don’t touch the IPO for a ew days, let it settle. There will be a manip run on the stock at the start, many will be taken in by the hype of course, just like always, then it’s time for trading as usual once you see something resembling a peak.

If you are a vendor, a groupon can get you one of two things
1) Existing customers to come in
2) new customers

If you are getting existing customers your problems are 2 fold. First, you are subsiziding your existing product they already buy by 75% or more if Groupon takes more than half on the deal. If I do 50% off, and groupon gets 25% of the remainder, I have effectively just given my existing customers a 75% deal.
Second, your lower the pricepoint that existing customers expect. If my coffee is generally 2 bucks, but they got it for 1 through groupon. They will come to expect to get a coffee for 1 buck

New customers – this is the only way groupons will help a business. You lure new customers with a cheap deal in hopes they will come back to buy the product at full price. However, as you said, groupon now just attracts bums, the bargain hunter looking for a great price. Why would I come back to a restaurant that could be miles a way from my normal locations and pay full price? Basically you subsidized them too. And, if there is a rush of customers on the day of the groupon deal, your quality diminishes, and now you lose both existing customers and new customers. It’s a terrible deal for non-scalable vendors.

Absolutely agreed. Groupon doesn’t have much of a chance other than as a brand. They need to pivot before the competition (Google, Facebook et al) eat them up. But what else could they move into given their greatest asset is a good call centrer and probably the most up-to-date high quality small/medium business contacts database available?.

Good question, and it seems a multi-million dollar one at that. I think, aside from its vendor database, another huge asset is its customer database, some 83million. What groupon does is essentially flip advertising around on its head; instead of paying advertisers upfront to post in traditional media, you pay on the back end in the form of price cuts. That idea works.

The problem is it more generally seems to work well for groupon than for vendors. As more players enter the groupon game (Facebook, Google, yahoo) that 50% split you are doing with the vendor will be diminshed because those other companies will be competeing for those same vendors.

If they sign exclusive rights to market for the vendors (I don’t know if they do), then the vendors are the biggest asset. One possibility would be to have target advertising to the vendors themselves, not just the customers. After all, the vendors have to buy things to make their products, and with an extensive list of small and medium businesses you can probably get them better prices for goods by aggregating their needs and driving down the costs to buy, say, the beans for a coffee, or the seafood at a restaurant. Im not sure this is possible, but I’m just brain storming.

You could also possibly sell the local purchasing habits of invidivual customers to the likes of google, maybe enhancing their targeted ads on websitse, but again, just speculation.

That’s an interesting way to look at Groupons model. The business is still paying, but it’s like a delayed payment model, with payment linked to actual sales. Similar to a reverse affiliate/sales commission deal. If a business can get a handle on sales so they make a profit even after their cut, they’re golden.

Exclusivity would be a good idea, but I can’t see many business owners wanting to sign an exclusivity deal unless it came with a VERY low % (effectively free advertising in exchange for not using competin services). If it did work out that way, I can’t see it lasting very long as once competition heats up everyone loses.

Aggregating – Nice idea, but a significantly different business then they’re in right now. Could work in the right hands though.

Selling data – Valuable, but I suspect potential buyers (Google/Facebook) already have more than enough data on our habits..Although they could always use more.

Given those potential moves, I’d think Groupon has some growth potential once it’s stock settles if it plays its cards right. Until then, I’m personally waiting it out.